DO SURCHARGES INFLUENCE OUR CHOICE OF PAYMENT INSTRUMENT? THEORY AND EVIDENCE

Abstract

Cash withdrawals effected at an Automated Teller Machine (ATM) external to the network of the bank of the cardholder incur a surcharge fee. We investigate whether surcharges impact cash withdrawals and the use of bank card. We develop a toy theoretical model that takes into account both the heterogeneity of cash preference relative to card and the heterogeneity of the disutility of nypassing surcharges by moving to an ATM that belongs to the cardholder’s bank. We find that cardholders withdraw greater amounts more often at such ATMs when surcharges are implemented. Surcharges do not influence the amount of card transactions, unless the fee is sufficiently high relative to the inconvenience of cash holding. We also conduct an empirical analysis focusing on the French case. Most French banks implemented surcharge fees quasi-simultaneously, immediately after the enactement of a European Commission regulation (EC 2560/2001), making it easier to evaluate the impact of the fee. Exploiting a unique database originating from the French Automated Clearing House, we find a structural break in the number of withdrawals of non depositors and in the corresponding average amount. Consistent with the theoretical analysis, we find no evidence of a structural break in the amount of card transactions. Based on our results, we recommend a policy of incentives towards the generalization of surcharges and towards an increase in their amount.